For one thing, a rising stream of distributions will push a trust’s or corporation’s share price steadily higher over time. That’s been the formula for all successful Portfolio recommendations since CE was founded four years ago.

More important in this fear-drenched market, secure distributions are the best possible assurances we have that damage suffered by our favorites now will prove temporary. And the cash we receive each month is a very strong incentive for holding on.

Of course, all that goes out the window when a trust or corporation is forced to cut its distribution. That’s the stuff that turns a retreat into a rout. And the hole blown into your portfolio isn’t easily repaired when overall market conditions inevitably turn up again.

Gauging dividend safety is consequently critical, and there’s no time to gauge it like earnings season. Several trusts and corporations tracked in the How They Rate Table have already reported their numbers. CE’s top picks’ results are reviewed in the Portfolio section, and others are noted in the How They Rate Table. With very few exceptions, most of the rest will release their numbers by the end of next week, and we’ll be updating you via flash alerts and the How They Rate Table as they appear.

The good news is, from what we’ve seen so far, the best trusts are still holding up well against the triple challenge of a weakening North American economy, rising raw materials costs and still-tight credit market conditions. That’s very welcome news indeed because it means their distributions are safe for at least another quarter.

The bad news is investment markets are now squarely focused on what could go wrong in the second half of 2008 and early 2009. The massive selloff in energy-related trusts and corporations in recent weeks is entirely driven by worries about a US economic contagion sweeping into Asia and slashing demand for energy and other raw materials. Those fears are also having an impact on the Canadian loonie’s exchange value, which has dropped several percentage points against the US dollar in just a few weeks.

Ultimately, a cooling off of commodity prices is probably the best possible medicine for the ailing US economy. And a respite in the loonie’s multiyear climb is definitely what the doctor ordered for Canadian trusts and corporations that do business and/or own assets in the US.

Unfortunately, the immediate impact on our Canadian holdings has been negative, as the US dollar value of share prices and distributions has dipped faster than the Canadian dollar value. That’s accentuated the negative impact of down days and diminished the positives from up days.

Previous bull markets in commodity prices and related currencies have suffered disconcerting selloffs along the way. This one, for example, faced voracious bearishness a year ago before blasting off again. Bull markets only truly end when there’s sufficient permanent demand destruction and development of new supply to tilt the balance of market power decisively from producers to consumers.

Tectonic shifts of that magnitude have never been achieved solely by recessions, no matter how severe. In fact, the recession-spurred drops in prices have typically discouraged needed conservation, alternatives and investment in new supplies. And once the economy revived, so did commodity prices.

That’s still the most likely scenario for the next few years. And it’s very bullish for Canadian trusts and corporations of all stripes. Meanwhile, the key to making it through the current mayhem is to focus on yield—namely your holdings’ ability to maintain and preferably increase distributions.

You’ve got to be willing to hang in there with picks that are performing well as businesses, though they’re giving ground in the market place. Admittedly, that’s not easy to do emotionally. But you’ll be in very good company: Insider buying is picking up for Canadian trusts and corporations, and so is takeover activity.

Last month, Fording Canadian Coal (NYSE: FDG, TSX: FDG.UN) was purchased by the operator of its holding Teck Cominco for a combination of CAD82 in cash and 0.245 Teck shares. Meanwhile, Somerset Entertainment Income Fund (TSX: SOM.UN, OTC: SOEIF) was purchased by Fluid Music Canada for CAD4 in cash.

Both deals were done at hefty premiums to pre-deal market prices. Odds are they won’t be the last. We’ll keep you posted.

As long as Canadian Edge Portfolio holdings perform well as businesses, any red ink they suffer now will be temporary—and I’ll continue to recommend them. The good news is second quarter earnings are generally coming in strong. The only exception thus far is GMP Capital Trust (TSX: GMP, OTC: GMPCF), reviewed in the Aug. 7 Flash Alert, is a continuing hold.

That’s the best possible security for distributions as well. If I do see worrisome numbers, I’ll recommend selling in flash alerts in coming days. Barring that, I’ll be holding on and even adding to positions.

The hang-in-there advice also applies to my energy producer trusts. Despite the selling over the past month, these are still well ahead for the year. They’ll no doubt slip further if oil and gas prices slide more. But cash flows are secure, business numbers are coming up strong, they’re cheap, and the market is no longer frothy.

Consequently, I’m no longer recommending taking money off the table.

Both of the August High Yields of the Month picks are utility and energy infrastructure plays, by far the most recession-proof business in North America. The Aggressive Portfolio recommendation—Boralex Power Income Fund (TSX: BPT.UN, OTC: BLXJF)—yields more than 14 percent and should also throw off sizeable capital gains, provided it holds the current level of distributions, as I expect.

The Conservative Portfolio play is Pembina Pipeline Income Fund (TSX: PIF.UN, OTC: PMBIF), easily the lowest-risk bet on the continued growth of Canada’s oil sands. Yielding more than 9 percent, the pipeline and infrastructure trust has just increased its distribution by 8.3 percent. That’s its fourth big boost since Halloween 2006 and a portent of good things ahead, however it’s organized after 2011.

How They Rate

This month’s edition of How They Rate features a major realignment of trusts by business. New categories are as follows. Note that corporations are now listed along with trusts in each group:

Here are advice changes. See the How They Rate Table for updated second quarter payout ratios as they appear in the coming weeks, as well as for changes in buy targets. Price and yield information is updated every 15 minutes in both tables. Use this service as a reality check when errors occur with US quotes-based services.

Once again, column four of the table shows dividend frequency and the most likely way each trust will minimize 2011 taxation. “Foreign” indicates non-Canadian income, which isn’t taxed. “Pools” indicate tax pools used primarily by energy producers, which shield income dollar for dollar. “Depreciation” indicates businesses with large, noncash expenses that can be used to shelter cash flow. “None” indicates no visible method of avoiding 2011 taxes, though some trusts have stated their intention to simply outgrow their future liability and maintain distributions.

• Harvest Energy (NYSE: HTE, TSX: HTE.UN)—SELL to buy @20. Harvest has dropped like a rock over the past few months. It’s now pricing in a lot of risk, and my conversation with management (see Dividend Watch List) was encouraging.
• IBI Income Fund (TSX: IBG.UN, OTC: IBIBF)—Hold to buy @21. This trust continues to add to its high-growth franchise, and its shares are cheaper than they’ve been in a while.
• Phoenix Technology Income Fund (TSX: PHX, OTC: PHXHF)—Buy @18. This niche energy services trust is capable of strong growth on its own and is also a potential takeover target in this consolidating industry.
• Priszm Income Fund (TSX: QSR.UN, OTC: PSZMF)—Hold to buy @4. Second quarter earnings were an improvement, the latest distribution cut is likely to be the last and the shares are cheap enough.
• Quebecor (TSX: QBR.B, OTC: QBRCF)—Buy @34. A new entrant in the Quebec wireless market, it’s looking to expand its offerings to include wireless high-speed Internet and mobile telephone.
• Rogers Communications (NYSE: RCI, TSX: RCI.B)—Buy @38. It’s already begun deploying a third-generation (3G), W-CDMA/HSPA network, and dividend increases are likely.
• Telus Corp (NYSE: TU, TSX: T)–Buy @40. The company reports second quarter results today, Aug. 8, at noon. The key numbers are wireless data revenue and high-speed Internet subscriber growth.

Feature Article

Up until mid-2006, the Canadian energy services sector was the hottest thing on Bay Street. Then came the two-year plunge in natural gas prices, followed by the Halloween surprise that shut off trusts’ access to capital. The result was a literal sector depression, complete with massive distribution cuts, sharply plunging share prices and even bankruptcies.

Energy services trusts staged a mild recovery this year on hopes that rising gas prices would revive Canadian drilling, only to give back most of their gains over the past month as energy prices came down. Ironically, just as many investors are giving up, sector fundamentals are at last improving. I highlight the best of this now very cheap bunch, led by this year’s big winner, CE Portfolio pick and converted corporation Trinidad Drilling (TSX: TDG, OTC: TDGCF).

Canadian Currents

Canada’s communications industry has proven itself recession resistant this year. It also features explosive potential growth. CE Associate Editor David Dittman highlights the latest developments in the sector, the leading players and the best buys, now featured in their own How They Rate Table section.

Tips on Trusts

This section features short bits on a wide range of topics. For more evergreen and tutorial items, see the Subscribers Guide “Subscriber Tips” section. 

Dividend Watch List—Only two trusts cut distributions last month: GMP Captial Trust (see Aug. 7 Flash Alert) and Priszm Income Fund. Solid second quarter earnings, however, have elevated it to a buy for aggressive investors.

Trusts discussed with at-risk distributions include: Acadian Timber (TSX: ADN.UN, OTC: ATBUF), Canfor Pulp (TSX: CFX.UN, OTC: CFPUF), Harvest Energy (NYSE: HTE, TSX: HTE.UN), Jazz Airline Income Fund (TSX: JAZ.UN, OTC: JAARF) and TimberWest Forest Corp (TSX: TWF.UN, OTC: TWTUF).

Bay Street Beat—How the Canadian analyst community views trusts, including our favorite trusts.

What’s the Matter with SemGroup?—The once-large energy trader filed for bankruptcy late last month, uncovering an unusual connection between its possible speculation and oil prices.

The following is a regular repeat from prior issues.

Use our live quote feed on the How They Rate Table for US dollar prices of trusts intraday. For other information, go directly to a trust’s website by clicking on its name in the table. Clicking on the Toronto symbol (suffix “.UN”) will take you to the web site of our Canadian partner Toronto-based MPL Communications (133 Richmond St. West, Toronto M5H 3M8) www.adviceforinvestors.com, which has price charts and access to press trust releases. For questions and comments, drop us a line at canadianedge@kci-com.com. Check out the Toronto Stock Exchange Web site for a range of information on income and royalty trusts. The Web site www.sedar.com is an online library of documents filed by trusts with the Canadian equivalent of our Securities and Exchange Commission. The Toronto  Globe & Mail features the “Globe Investor” section with all the latest news on trusts. Dominion Bond Rating Service is the pre-eminent credit rater for trusts. The Bank of Canada Web site features a handy currency converter for Canadian dollars and US dollars into 50 other currencies around the world, and it’s a great source of free information on the Canadian economy.

Note the North American Free Trade Agreement (NAFTA) challenge to the Government of Canada’s “Tax Fairness Plan” is heating up. Interested investors should check out http://www.naftatrustclaims.com. Also, for late filers, the Income Trust Tax Guide has all the backup you need to file distributions as “qualified dividends.”

Roger Conrad
Editor, Canadian Edge